How I did it: Bought a home without a 20 percent down payment

In many instances, having to put a 20 percent down payment on a home can scare away prospective buyers. Learn about alternative strategies that can make homebuying a financial reality.

Like many renters, Austin Grieb and his wife wanted a place of their own—a home they could make theirs and a property that would garner them some equity. However, even as they began house shopping, Austin knew that they wouldn’t have 20% to put down on a home purchase.

“It’s interesting because I’ve always been told you have to have 20% for a down payment,” says Grieb, an Elavon employee “I just started looking into our options and realized that wasn’t the case.”

The couple purchased a home in Augusta, Ga. with a 10% down payment. Under the terms of their mortgage, they were able to do so with the understanding that private mortgage insurance (PMI) would also need to be in place, which increases their monthly mortgage payment.

For first-time homebuyers, the 20% down payment is often a perceived hurdle to homeownership, but it doesn’t have to be. There are multiple ways to purchase a home with a smaller down payment using PMI, mortgage programs specific to first-time homebuyers, and grants.

Using PMI to work in your benefit

Six in 10 Americans believe that you must put at least 20% down to buy a home, according to a recent survey. However, in today’s market, that’s a misconception. The National Association of Realtors reports that the median down payment in 2019 was actually just 12%.

If you’re applying for a conventional mortgage with less than 20% down, your lender may require that you purchase private mortgage insurance. Typically, most homebuyers wrap the premium for the insurance into their monthly mortgage payment. It’s important to know that PMI protects the lender from missing payments on your mortgage—if you fall behind on payments, you could still end up in foreclosure.

For Austin and his wife, PMI added about another $150 to each mortgage payment. When applicable under the PMI Cancellation Act, your lender is required to automatically drop your PMI once your mortgage balance reaches 78% of the original value of your home.¹

Down payment alternatives

While mortgage insurance is common, it’s not the only tool for first-time homebuyers considering how much to put down. Jennifer Wendt, a U.S. Bank employee in Minneapolis, worked with a mortgage loan originator from U.S. Bank who specialized in first-time homebuyers.

She qualified for a loan that allowed her to put down 5% on her condo without adding PMI to her payment. In addition, the loan provided some down payment assistance. In return, Jennifer attended a class for first-time homebuyers regarding financing and paying for your house as well as lessons in homeownership tips.

“I think if you’re considering buying, it’s important to talk to somebody who can outline all your options,” she says. There are myriad of programs available, and the assistance ranges from grants with zero interest, forgivable loans to low-interest loans.

Down payment assistance is typically aimed at first-time buyers, but not always. If you’re purchasing a second home, be sure to ask your lender about any available assistance resources. Those that qualify for such programs usually meet an income requirement, buy a home in a designated location or region, and/or keep their purchase under a maximum amount.

Down payment planning

Whether you opt for PMI or investigate assistance programs, spend some time considering ways you can contribute to a down payment and how your home purchase fits into your broader financial picture. For instance, before buying their first home, Jessica Oliver, a U.S. Bank employee in Minneapolis, first cut back her household expenses.

Jessica and her husband ended up putting 10% down on their Minneapolis-area home about two years ago, using PMI as part of their loan. The couple sold furniture they no longer needed and minimized their spending habits to save money for their monthly payment. Thanks to their frugality, they’re able to pay an extra $200 a month towards their mortgage bill.

They are also considering refinancing to eliminate the mortgage insurance. For Jessica, the decision to buy made good financial sense. “Even with PMI, we were still paying more for our rent than we are for our mortgage,” she says.

Risks to consider

The ability to put 20% down provides homeowners with instant equity in their house. Buyers that put down less risk owing more on their home than it is worth if the market takes a steep downturn like it did in the previous recession.

With that in mind, thinking about how long you plan to stay in your home is essential. “You want to make sure you’re buying a place that you’re willing to stay long term because it could take longer for your investment to become profitable,” Jennifer says.

For potential homebuyers, it’s important to remember that there are alternatives to large down payments. Even if you don’t have a sizeable amount of cash to put toward a home, you may still be able to buy a place of your own.

If homeownership seems right for you, check out our first-time homebuyer’s guide for more tips to help you get there. Or, talk to a mortgage loan officer in your area, they’ll help you get started.

¹If payments are current and in good standing, lenders are required to drop PMI once balances reach 78% of the original home value, according to the PMI Cancellation Act.